I’ve only ever owned two individual stocks in my whole life. Yes, before I became an index fund/ETF evangelist, I tried my hand at stock picking to less-than-stellar results. One of these stocks was Nova Lifestyles ($NVFY), a Chinese furniture manufacturer (and penny stock) while the other was Twilio ($TWLO), a cloud communications platform that companies use to text their customers.
I bought Nova back in February 2015 at $2.50 and sold it three months later at $2.92. It would go on to lose 85%. Two years later I bought Twilio at $29.42 and also sold it within a few months at $29.55. It would go on to gain over 1,000%. Though I didn’t lose money on either stock, I learned a lot about myself and investing. Below are five of those lessons.
1. Your Mind Can Justify Almost Anything
When I first purchased Nova Lifestyles back in early 2015 I did it on one thing and one thing alone—price. This was the $NVFY price chart over the prior year at the time (Note: ignore the absolute price level which is higher now than it was then due to Nova’s reverse stock split in 2019):
Seeing this chart I was immediately obsessed with buying it. I had been reading Buffett at the time and this seemed like an obvious, “Yes!” The classic beaten-down value stock! The bargain of a century! I could make a killing, right?
It was no mere coincidence that I had just read about Buffett’s investment in the Nebraska Furniture Mart and here I was finding a furniture stock of my own. Nova had consistent year-over-year revenue growth and they had 3x more current assets than current liabilities. It seemed like a good buy. Who cares that most of those “assets” were Nova’s receivables which had ballooned to 40% of their annual revenue?
Not me. Because I didn’t know what the hell I was doing and I didn’t know a damn thing about the furniture business. I just convinced myself that I did because I wanted to believe that this stock was artificially depressed.
Your mind can make yourself justify almost anything when you really want it to. And no one is immune from it. I have an economics degree from Stanford University, yet here I was buying stocks outside my circle of competence. Pedigree can’t save you from yourself.
Before you buy an individual stock, make sure you have a real clue as to why.
2. Eggs Can Always Go Lower
Joe Grundfest, the famed law professor, once told a story about a man who started buying egg futures because “eggs couldn’t go any lower than this.” But as that man soon learned—eggs can always go lower. I knew this lesson but temporarily forgot it while investing in the “bargain of a lifetime” that was Nova Lifestyles.
After buying the stock, it dipped below my purchase price on a few occasions over the next few months before I finally panic sold it for a 16% profit in May 2015:
The stock would go on to lose 85% after I sold it in a wild ride:
What I thought was a bargain actually turned out to be a falling knife in slow motion. My mistake was forgetting Grundfest’s timeless lesson from years prior—eggs can always go lower.
3. Being Early is the Same as Being Wrong
While I dodged a bullet with Nova back in 2015, two years later I ended up missing a rocketship. I bought Twilio in 2017 after I discovered that they were the company behind all the text messages I received anytime I called an Uber. I instantly understood why the company would be important in the future.
But, I had also just started this blog and began to question why I held any individual stocks at all. After watching Twilio bounce around for a few months while the S&P 500 sailed smoothly upward, I sold out slightly above where I originally bought:
I got lucky because by the end of the year Twilio would be down 18% while the S&P 500 was up 19%:
If I hadn’t sold in early April, I know I would have given up hope by year end.
Even after I sold Twilio, another year would go by before the stock started to takeoff. From when I sold back in April 2017 through today, Twilio is up over 1,000%:
Twilio’s rise vindicated my earlier beliefs, proving that I wasn’t wrong about the stock, just early. Unfortunately, the market doesn’t care if you were eventually right. Being early is the same as being wrong. It doesn’t matter if you knew something was going to be a hit if the rest of the market doesn’t agree with you.
This is why there are people getting rich from tech stocks now and why there weren’t any getting rich from them in the early 2000s. Those who bought in the late 1990s/early 2000s were just early, but this, unfortunately, makes them wrong.
4. It’s Hard to Earn Your Upside
The bigger takeaway from missing out on Twilio is that I always would have missed out on Twilio. Why? Because I know myself. I know that I would have sold out early once the gains got too good.
For example, say I actually bought and held Twilio past April 2017, by mid 2018 I would’ve been sitting on a 100% long-term capital gain:
And you think I would have held? No way. 100% in 18 months? I would have sold that thing in a heart beat.
This is why earning your upside is so hard with individual stocks. After seeing big gains it’s hard to imagine even bigger gains in the future. So you will battle with your self internally and likely sell early. Some people can overcome this feeling, but I know I can’t.
5. Your Stocks Can Own You
The biggest lesson I learned from owning stocks is that your stocks can own you. Though Nova and Twilio never represented more than 5% of my net worth, they took up 95% of my investment attention. I would find myself checking their tickers throughout the day, everyday, while ignoring what the rest of my portfolio was doing.
I could be losing $1,000 in the S&P 500 yet I was far more worried about losing $200 in Twilio. It made no sense.
I later realized that this was happening because my active stock picks became a part of my investment identity. In order to free myself from their mental grip, I had to disassociate from them. I had to sell out in order to regain control over my day-to-day financial life.
I don’t know why, but picking individual stocks always feels like they are a part of me, while picking an index fund or even a factor tilt (i.e. small cap, value, etc.) doesn’t feel the same way.
Whatever you decide when it comes to investing in individual stocks, make sure you own your stocks and they don’t own you.
Special thanks to YCharts for making it so easy to put together this post. Mention “Dollars And Data” to receive 20% off (*New YCharts users only). Lastly, happy investing and thank you for reading!
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This is post 218. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data